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September 27, 2011

Industry leaders divided over Barnier’s EC draft

Mid-tier firms have largely welcomed EC draft proposals on audit while the Big four warned some of the proposals could affect audit quality.

The draft proposals, widely leaked to the media this week, recommend mandatory audit firm rotation, the banning of non-audit services, joint audits, audit quality certification, expanded audit reports and EU oversight reform.

Some of the draft proposals have been widely welcomed, such as the abolition on restrictive lending clauses, an EU audit passport and improved transparency in the tendering process. Other proposals on mandatory re-tendering and the banning of non-audit services are far less popular, while there is a split between the Big Four and mid-tier on joint audits.

The proposal on non-audit services to audit clients could threaten the future of the Big Four as multi-service entities. It could force firms to drop audit clients or operate as audit-only firms.

PwC UK head of regulatory policy Pauline Wallace told the International Accounting Bulletin some of the more radical proposals could endanger audit quality.

“You have to ensure you have confidence in the market that a strong high quality audit can provide. Most of the proposals in there at the moment will impair audit quality not improve it,” Wallace said, while stressing the proposals are only drafts and it is not time to panic.

Deloitte UK said any changes to the audit market must not be detrimental to audit quality and should focus on economic growth.

“In addition, we believe the costs of any proposals for audited entities should not outweigh the benefits derived from improved audit quality and auditor choice,” Deloitte said.

While he welcomed the proposals, BDO International chief executive Jeremy Newman expressed some concern on his understanding of the details.

“I am concerned by the range and extent and inter-relationship of some of the proposals,” Newman said.

“If I understand correctly what has been presented to me, the logistics of having a nine year mandatory rotation of firms, seven year rotation of partners, five year tendering and doing it with joint auditors could become very challenging.

“If you look at the combination of all those things it may be going too far. I think it could just be too much for corporates [to cope with].”

RSM International chief executive Jean Stephens said the process still has some way to go but broadly she is pleased with the overriding sentiment of the draft proposals.

“We are pleasantly surprised at the ambitions of the commission’s proposals that will go through discussion,” she said.

“What remains after the discussion process is going to be quite interesting. I think many ways the discussion has evolved and hopefully some measures, such as the ban on Big Four only clauses are going to stick.”

Crowe Horwath International has also backed joint audits and periodic tendering but believes mandatory firm rotation will affect audit quality.

It is too early to speculate on who will be the winners and losers of Barnier’s vision, but a common view from the profession is that any changes must not compromise audit quality or further destabilise the economy.

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